Palm reportedly has 1.5 million unsold Palm Pre and Pixi units. It has halted sales, a sign of the company's deep problems. (Source: Palm via VentureBeat)

Bad news continues for veteran mobile device maker

Palm,
maker of the Pre and Pixi smartphones, is facing desperate
times.American
Banking News has reported that
Palm's production halt continues as it is unable to sell the
stockpile of webOS handsets it has built up. There's no
official word from Palm, but the announcement seems likely to be true
as Palm stock plunged 30 percent to around $4 a share following the
news.

Palm has a rich history and helped to launch the PDA and
smartphone movements. Lately, it has struggled to keep up with
Apple iPhone and Research in Motion Blackberry smartphones. And
smartphones have largely killed the market for PDAs, so Palm can no
longer seek refuge in that market.

In 2008, Palm saw the
writing on the wall and made an ambitious bid to retake the market.
After much investment, it unveiled
webOS, its new smartphone operating system. In June 2009,
the Palm Pre launched
on Sprint, America's third largest wireless
carrier.

Commentary on the smartphone and its OS
was mixed, but overall was somewhat positive. The interface was
much like the iPhone, but it lacked the iPhone's extensive app
library and used slower interpreted code for apps (as opposed to
native code). Perks, though, included multitasking and a
physical keyboard.

Since the launch of the Pre, Palm has done
its best to beef up its offerings, releasing the cheaper Palm Pixi
handset and the Palm Pre Plus on Verizon, the nation's largest
network (Sprint was the first to get the Pixi). It also
released a new software development kit that allowed native
application code via the Simple Direct MediaLayer. The results
were impressive -- Palm devs were able to quickly port both Doom and
Quake to the phone, a feat impossible with interpreted code.

For
all that effort, Palm's sales continued to slip as it saw Apple and
RIM post gains. People simply didn't seem interested in the
Palm handsets.

Over
The Air in
February reported that Palm had shut down its production of webOS
handsets. Palm claimed at the time that the shutdown was
temporary -- just a closure for the Chinese New Year.

Now it
appears that the shutdown was not just for the holidays. Palm's
poor sales, showcased by its miserable
Q1 2010 calendar quarter (its fiscal Q3 2010), are catching
up to it and it is developing a large overstock of webOS
phones. According
to Morgan Stanley Analyst Ehud Geldblum, Palm this quarter
produced 960,000 phones, but amazingly has only sold 408,000 of
them. The total overstock is estimated to be 1.5 million units,
following a 29 percent drop in sales in the first quarter of this
year, which ends at the end of this month. Palm's revenue has
reportedly dropped $22M USD over the current quarter.

To put
Palm's unfortunate failure in context, Google's Android sold
5.5 million units in Q4 2009 and Apple moved 7.5 million
iPhones. That means that Palm's sales for entire quarter are
approximately the number of units Apple or Google sell in a single
week.

Even if Palm was incredibly able to continue the sales
pace of its Pre and Pixi (which is perhaps possible given its new
Verizon contact), it would take nearly a year before it could sell
off its stock. By then new Android handsets would have arrived,
a new iPhone, and Windows
Mobile 7 -- all while Palm is stuck trying to unload
increasingly dated handsets.

Palm will likely be forced to
turn to deep discounting. At first blush this might seem happy
news for the consumer, but ultimately it is not a
good thing as it will hurt Palm badly, which in turn will hurt Palm's
ability to promote a successful app market for consumers.

Despite
all the bad news surrounding Palm these days, there was a bit of good
news for the company today. AT&T announced that both the Pre Plus
and the Pixi Plus will
be heading to its network “soon”.